Traditional IRA’s vs. Roth IRA’s

One difference between the two IRA’s has to do with deductions.

Traditional IRA – If you contribute $5,000 this year, you can deduct that from you taxable income. This mean’s you are not being taxed on the $5,000 this year, but when you withdraw this money from you IRA in the future, you will be taxed on it at that point. That $5,000 might be worth $10,000 then, meaning you will pay twice as much on taxes.

Roth IRA – If you contribute $5,000 this year, you cannot deduct it from you taxable income, so you will pay taxes on it the tax year it is contributed. The benefit is that if it is worth $10,000 in the future, you will not have to pay any additional tax. Essentially, you made $5,000 tax free.